Fed’s Bullard Favors Central Bank Putting Floor Under Inflation

Federal Reserve Bank of St. Louis President James Bullard said Thursday that the central bank should enhance its guidance on the future of interest-rate increases by clarifying how weak inflation affects its policy choices.

The official told reporters that he would like the Fed to tell markets and other observers it will not raise rates if inflation goes below 1.5%. He said that offering this guidance “fits well” with the Fed’s current system that says it will not raise rates until the current 7.3% unemployment rate falls below 6.5%, so long as expected inflation does not rise about 2.5%.

This tweak in inflation would add more information about what the Fed will do with short-term rates, which it currently pegs effectively at zero percent. Putting a floor on price pressures would convey that “if we are in a low inflation environment, especially one that’s threatening to stay low, then we would not raise rates in that environment regardless of what’s going on,” Mr. Bullard told reporters after a speech.

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